- U.S. Securities and Exchange Commission (SEC, or Commission) Chair Gary Gensler reaffirmed his view that the "vast majority" of cryptocurrency tokens are securities, and recent agency enforcement actions appear to signal the Commission's alignment with this view.
- Chair Gensler remarked that "[s]ome tokens may not meet the definition of a security," which he described as "crypto non-security tokens," but he emphasized that all "crypto security tokens" and related intermediaries would continue to be subject to strong SEC oversight.
- Chair Gensler's recent comments also appear to demonstrate an increased focus on crypto intermediaries – whether centralized or decentralized (e.g., DeFi) – with specific concerns related to intermediaries providing multiple services that are required to be separated in the traditional securities markets.
- In response to requests for more guidance in the crypto industry, Chair Gensler stated that "the Commission has spoken with a pretty clear voice here: through the DAO Report, the Munchee Order, and dozens of enforcement cases."
In prepared remarks delivered at the Practising Law Institute's "SEC Speaks" program on September 8, Chair Gensler emphasized and reiterated his long-standing position that the vast majority of cryptocurrency tokens are securities, and he noted that "only a small number of tokens, even though they may represent a significant portion of the crypto market's aggregate value" may qualify as "crypto non-security tokens." Gensler's remarks are in line with the position he has historically promoted and are consistent with increased crypto-related enforcement actions by the Commission.
Chair Gensler began his recent remarks by expressing his view that "[n]othing about the crypto markets is incompatible with the securities laws. Investor protection is just as relevant, regardless of underlying technologies." This stance echoes the position he took in an August 2022 op-ed titled "The SEC Treats Crypto Like the Rest of the Capital Markets," wherein Chair Gensler pointed to recent market events demonstrating the applicability of U.S. securities laws and referred to the SEC as "the cop on the beat." Still, Chair Gensler did acknowledge that "it is important to look at the facts and circumstances of a product, not its label, to determine whether it is a crypto security token, a crypto non-security token, or another instrument."
Chair Gensler responded to calls for further regulatory guidance from the cryptocurrency industry by arguing that the Commission has "spoken with a pretty clear voice" on this issue, citing the SEC's DAO Report and the Munchee Order, which halted a 2017 initial coin offering based on securities law concerns, as well as "dozens of Enforcement actions, all voted on by the Commission." According to Chair Gensler, "Not liking the message isn't the same thing as not receiving it."
Chair Gensler also addressed "so-called stablecoins." According to Chair Gensler, "Stablecoins have features similar to, and potentially competing with, money market funds, other securities, and bank deposits, and raise important policy issues." He distinguished between stablecoins that are "purportedly ... backed by reserves of U.S. dollars" and "so-called algorithmic stablecoins," and he noted that algorithmic stablecoins "bear heightened risks related to whatever mechanisms are used purportedly to maintain a stable value."
Addressing the role of cryptocurrency market intermediaries – whether centralized or decentralized – Chair Gensler said, "Given that many crypto tokens are securities, it follows that many crypto intermediaries are transacting in securities and have to register with the SEC in some capacity." Specifically, the Chair characterized platforms that "engage in the business of effecting transactions in crypto security tokens for the account of others" as brokers and those who "engage in the business of buying and selling crypto security tokens for their own account" as dealers, noting that "[c]rypto investors should get the protections they receive from regulated broker-dealers." Similarly, Chair Gensler noted that "many crypto intermediaries provide lending functions for a return," and he said, "Make no mistake: If a lending platform is offering and selling securities, it too comes under SEC jurisdiction." These remarks are almost identical to remarks the Chair made in 2021 at the Aspen Security Forum, where Chair Gensler also urged cryptocurrency intermediaries to "come in, talk to us, and register."
With regard to the range of services offered by crypto-asset intermediaries, Chair Gensler expressed concern over what he described as the "commingling" of multiple services "that typically are separated from each other in the rest of the securities markets," such as exchange functions, lending, broker-dealer functions, and custodial and clearing functions. He announced that moving forward, SEC staff will begin to work with crypto intermediaries to ensure the proper registration of services by type, "which could result in disaggregating their functions into separate legal entities to mitigate conflicts of interest and enhance investor protection." Chair Gensler had previously criticized cryptocurrency exchanges for offering multiple services giving rise to potential conflicts of interest.
SEC Crypto Enforcement in 2022
Chair Gensler's remarks this week come after a year of increased SEC scrutiny of the cryptocurrency sector, demonstrated by the agency's uptick in crypto-related enforcement. In May 2022, the SEC significantly increased the enforcement staff of its Crypto Assets and Cyber Unit to ensure that the Commission was "better equipped to police wrongdoing in the crypto markets." Following this expansion, the Commission signaled a new focus on consumer-facing digital asset trading products and services. By mid-June 2022, media reports indicated that the SEC had launched an inquiry into insider trading at multiple cryptocurrency exchanges.
Shortly thereafter, in mid-July 2022, the SEC alleged that multiple tokens listed by Coinbase are securities, and it brought its first insider trading case of "crypto asset securities," against a former Coinbase product manager and two of his associates. Additionally, the SEC has announced numerous cryptocurrency-related enforcement actions and settlements over recent months, including a complaint filed against Dragonchain and a recent settlement agreement with Bloom Protocol, both of which stem from allegations that the platforms' tokens were unregistered securities.
Given the SEC's heightened enforcement activities and Gensler's recent remarks, the cryptocurrency industry should expect to see continued regulatory scrutiny and aggressive enforcement efforts.
Cryptocurrency exchanges, lenders, and businesses planning to create or otherwise integrate cryptocurrency tokens into their business models would be well advised to ensure that they are operating within the confines of the applicable securities laws, regulations and best practices as Chair Gensler continues to direct enforcement resources toward the cryptocurrency sector. The potential for federal legislation that would give the federal prudential and market regulators specific authority to regulate these exchanges and the offerings is underway and will continue into the next Congress.
Chair Gensler is scheduled to testify before the Senate Committee on Banking, Housing and Urban Affairs at 10 a.m. on September 15, 2022. Committee members will likely question Chair Gensler on his plans to issue proposed rules for cryptocurrency market participants, among other topics.
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